Rupee depreciation - How? Why? When?

Why Rupee is going down?
What exactly does the term Rupee Depreciation mean?
In simple terms, Rupee depreciation means that the rupee has become less valuable with respect to US dollar and other countries can buy more from Indian markets by spending the same amount of dollars, which in turn means that our exports are more lucrative to foreign countries.(Since all the business transactions are carried out in US dollars).
Major Causes of Rupee Depreciation
1) Demand Supply Rule:
Why does rupee fluctuate?
The value of a currency, like any traded goods or services, depends on demand and supply. If there is more demand of dollars in the currency market and is not adequately matched by the supply, other things remaining equal, the rupee price of dollar will go up or the rupee will depreciate. Conversely, if the supply of dollar is higher than the demand, the rupee will appreciate. We are referring to dollar as it is the most preferred hard currency for cross-border transactions.
What affects demand and supply?
The supply of dollars depends on two factors—exports and investments. When goods or services are exported, the exporter gets the payment in dollars which is converted into rupees in India, boosting the supply of dollars. On the other hand, if individuals or companies buy goods and services from abroad, they need dollars to settle the bills, leading to an increased demand of dollars.
If a country exports more than it imports, the currency will tend to appreciate and vice-versa.
Now, every country has an external account to keep a track of the cross-border transactions being carried out. This external account has two components:
Current Account: Cross-border transactions in the goods and services market is recorded in the current account .
Capital Account: This records cross-border flow of investment and debt.
Why is rupee depreciating?
India runs a current account deficit, which gets compensated by the inflow on the capital account (foreigners investing in India, including direct and portfolio investments).
In recent times, our current account deficit has widened and capital flows are not being able to bridge the gap. In the quarter ending June, the deficit expanded to 6.7% of the gross domestic product compared with 4.3% in the same quarter last year. As a result, the demand for dollars is high, while the supply remains low. Hence, the rupee is falling.

2) Dollar gaining strength against the other currencies:
The Reserve Banks of Eurozone and Japan are printing excessive money due to which their currency is being devalued. On the other hand, US Fed has shown signs to end their stimulus (Stimulus is a plan devised by the central banks to counter a weak economy by jump starting it. During stimulus a government takes unprecedented actions such as lowering interest rates, increasing government spending and quantitative easingso as to put some life in the struggling economy. The side effect includes weakening of currency) .
Hence, making the US dollar stronger against the other currencies including the Indian rupee, at least in the short term.
3) Oil prices:
It is another factor that puts stress on the Indian Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-on-year. The domestic demand for oil increases which causes the price of oil to increase in the international market. The demand for dollar also increases to pay our suppliers from whom we import oil. The effect is cumulative like an Avalanche breakdown. This increase in demand for dollar weakens the rupee further.
As suggested by Quora User,the main reason why government is directly responsible on this front is because of it's policy paralysis. The Indian government's present policies on Oil & Gas subsidy is why the prices are going high.Much remains to be done by the government on this aspect.
55% of India's oil imports are used for transportation of goods and people. And 50% of that or 27% of the total is used for transporting the 1.8% Indians who own cars from A to B in cars that weigh at least 15 times the weight of the owners (the Maruti Alto weighs 1156kg and an average Indian less than 70kg). This private transport is subsidized explicitly (if the car is diesel powered) while Indian Railways and rail travelers are forced to pay un subsidized market prices for diesel. Who Benefits From India's Diesel Subsidy? By S.G.Vombatkere
So 1.8% of the car owning public is majorly responsible for the oil demand and oil imports and the Rupee depreciation thanks to the policies of our allegedly "pro-poor" government.
4) Volatile domestic equity market:
Our equity market has been volatile for some time now. Equity is nothing but the investments in Indian companies made by Foreign Institutional Investors(FIIs). Some examples of Private equities investing in India are Blackstone, IFC, Berkshire Hathaway etc.
So, the FII’s are in a dilemma whether to invest in India or not(because of the lack of overall confidence in the Indian economy as explained later in my answer). Even though they have brought in record inflows of dollar to the country this year, chances are they may be thinking of taking their money out of the equity market,which might again results in less inflow of dollars in India. Therefore, decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar.
Repercussions of falling Rupee
Significant depreciation affects the overall confidence in the economy and policy making becomes difficult. Importers have to shell out more rupees for the same amount of goods in dollars leading to inflation. For example, suppose an Indian buyer pays Rs 50 for an article priced at $1. If the currency depreciates to Rs 60, the buyer will have to pay Rs 10 extra for the same article, still priced at $1.
It hurts foreign investors as they get fewer dollars for the same amount of rupees realized. It also increases the liability of companies having dollar debt as they need to earn more rupees to repay the same debt. It, however, benefits exporters as goods become cheaper in dollar terms.



1) When Sub-prime crisis hit the world, India and China were the leaders in terms of growth. When US and Euro zone started quantitative easing (QE), there was easy money available for investment funds and it flew to fast growing economies - India and China. (Remember, Rupee went as high as Rs. 39/ Dollar during this time)
2) When Supreme Court questioned 2G/3G scams and prevalent policies, officers following those policies were also brought under investigation and they were questioned as well as officers who broke those policies. Same happened in Coal scam as well. Now, this created confusion in the mind of bureaucracy. Officers stopped signing files. This led to environment of Policy Paralysis. Opposition also helped it by disrupting parliament.
3) Fast growth in economy led to increased income and explosion in demand, which in turn led to supply side led inflation. RBI hit hard to control Inflation, which led to increased interest rates. Investment became costlier for companies, which further increased demand-supply gap.
4) Prolonged recession caused decrease in exports, specially towards US and Euro zone. Higher imports of Oil and Gold led to increase in Current Account Deficit (CAD).
5) Almost a month back, US treasury head made a statement of stopping QE, money started flowing back to US. All currencies dropped compared to US Dollar. However, Rupee fall is drastic because of high CAD and higher flow of dollar from the country (remember India and China got major share of dollars during QE, and China currency is controlled. US funds needed Dollars which increased its demand).
6) When Rupee started going down, exporters held on to dollars they earned by selling products in hope of earning more if Rupee fell more. This increased demand - supply gap for dollar. This led to downfall of Rupee.
Now, as far as controlling this downfall is concerned, RBI first hit the exporter's practice of holding on to dollars. Then Government tried to get more dollars from NRIs. Now, Government is trying to control imports. (Oil import cannot be reduced because of energy requirement, however gold import can be, as well as other non essential items). Govt. also opened up many sectors for FDI (However, I don't think it will help because we have elections next year and no company will make long term investment in a political uncertain environment. That is why no retail company is making investment even after opening this sector).

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How GOLD affects an economy

Gold is one of the most widely discussed metals due to its prominent role in both the investment and consumer world. Even though gold is no longer used as a primary form of currency in developed nations, it continues to have a strong impact on the value of those currencies. Moreover, there is a strong correlation between its value and the strength of currencies trading on foreign exchanges.
To help illustrate this relationship between gold and foreign exchange trading, consider these five important aspects:
1. Gold was once used to back up fiat currencies.
As early as the Byzantine Empire, gold was used to support fiat currencies, or the various currencies considered legal tender in their nation of origin. Gold was also used as the world reserve currency up through most of the 20th century; the United States used the gold standard until 1971 when President Nixon discontinued it.
One of the reasons for its use is that it limited the amount of money nations were allowed to print. This is because, then as now, countries had limited gold supplies on hand. Until the gold standard was abandoned, countries couldn't simply print their fiat currencies ad nauseum unless they possessed an equal amount of gold. Although the gold standard is no longer used in the developed world, some economists feel we should return to it due to the volatility of the U.S. dollar and other currencies.
2. Gold is used to hedge against inflation.
Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency. For example, in April 2011, investors feared declining values of fiat currency and the price of gold was driven to a staggering $1,500 an ounce. This indicates there was little confidence in the currencies on the world market and that expectations of future economic stability were grim.
3. The price of gold affects countries that import and export it.
The value of a nation's currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.                                            In other words, an increase in the price of gold can create a trade surplus or help offset a trade deficit. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises. For example, countries that specialize in producing products made with gold, but lack their own gold reserves, will be large importers of gold. Thus, they will be particularly susceptible to increases in the price of gold.
4. Gold purchases tend to reduce the value of the currency used to purchase it.
When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency. (This metal's rich history stems from its ability to maintain value over the long term. For more, see 8 Reasons To Own Gold.)
5. Gold prices are often used to measure the value of a local currency, but there are exceptions.
Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
For example, if there is high demand from an industry that requires gold for production, this will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time. Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.
The Bottom Line
Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies. (This article explores the past, present and future of gold.
 

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What happened to pluto?

Pluto was first discovered in 1930 by Clyde W. Tombaugh at the Lowell Observatory in Flagstaff Arizona. Astronomers had long predicted that there would be a ninth planet in the Solar System, which they called Planet X. Only 22 at the time, Tombaugh was given the laborious task of comparing photographic plates. These were two images of a region of the sky, taken two weeks apart. Any moving object, like an asteroid, comet or planet, would appear to jump from one photograph to the next.

After a year of observations, Tombaugh finally discovered an object in the right orbit, and declared that he had discovered Planet X. Because they had discovered it, the Lowell team were allowed to name it. They settled on Pluto, a name suggested by an 11-year old school girl in Oxford, England (no, it wasn’t named after the Disney character, but the Roman god of the underworld).

The Solar System now had 9 planets.

Astronomers weren’t sure about Pluto’s mass until the discovery of its largest Moon, Charon, in 1978. And by knowing its mass (0.0021 Earths), they could more accurately gauge its size. The most accurate measurement currently gives the size of Pluto at 2,400 km (1,500 miles) across. Although this is small, Mercury is only 4,880 km (3,032 miles) across. Pluto is tiny, but it was considered larger than anything else past the orbit of Neptune.

Over the last few decades, powerful new ground and space-based observatories have completely changed previous understanding of the outer Solar System. Instead of being the only planet in its region, like the rest of the Solar System, Pluto and its moons are now known to be just a large example of a collection of objects called the Kuiper Belt. This region extends from the orbit of Neptune out to 55 astronomical units (55 times the distance of the Earth to the Sun).

Astronomers estimate that there are at least 70,000 icy objects, with the same composition as Pluto, that measure 100 km across or more in the Kuiper Belt. And according to the new rules, Pluto is not a planet. It’s just another Kuiper Belt object.

Here’s the problem. Astronomers had been turning up larger and larger objects in the Kuiper Belt. 2005 FY9, discovered by Caltech astronomer Mike Brown and his team is only a little smaller than Pluto. And there are several other Kuiper Belt objects in that same classification.
Astronomers realized that it was only a matter of time before an object larger than Pluto was discovered in the Kuiper Belt.

And in 2005, Mike Brown and his team dropped the bombshell. They had discovered an object, further out than the orbit of Pluto that was probably the same size, or even larger. Officially named 2003 UB313, the object was later designated as Eris. Since its discovery, astronomers have determined that Eris’ size is approximately 2,600 km (1,600 miles) across. It also has approximately 25% more mass than Pluto.
With Eris being larger, made of the same ice/rock mixture, and more massive than Pluto, the concept that we have nine planets in the Solar System began to fall apart. What is Eris, planet or Kuiper Belt Object; what is Pluto, for that matter? Astronomers decided they would make a final decision about the definition of a planet at the XXVIth General Assembly of the International Astronomical Union, which was held from August 14 to August 25, 2006 in Prague, Czech Republic.
Astronomers from the association were given the opportunity to vote on the definition of planets. One version of the definition would have actually boosted the number of planets to 12; Pluto was still a planet, and so were Eris and even Ceres, which had been thought of as the largest asteroid. A different proposal kept the total at 9, defining the planets as just the familiar ones we know without any scientific rationale, and a third would drop the number of planets down to 8, and Pluto would be out of the planet club. But, then… what is Pluto?
In the end, astronomers voted for the controversial decision of demoting Pluto (and Eris) down to the newly created classification of “dwarf planet”.
Is Pluto a planet? Does it qualify? For an object to be a planet, it needs to meet these three requirements defined by the IAU:
• It needs to be in orbit around the Sun – Yes, so maybe Pluto is a planet.
• It needs to have enough gravity to pull itself into a spherical shape – Pluto…check
• It needs to have “cleared the neighborhood” of its orbit – Uh oh. Here’s the rule breaker. According to this, Pluto is not a planet.
What does “cleared its neighborhood” mean? As planets form, they become the dominant gravitational body in their orbit in the Solar System. As they interact with other, smaller objects, they either consume them, or sling them away with their gravity. Pluto is only 0.07 times the mass of the other objects in its orbit. The Earth, in comparison, has 1.7 million times the mass of the other objects in its orbit.
Any object that doesn’t meet this 3rd criteria is considered a dwarf planet. And so, Pluto is a dwarf planet. There are still many objects with similar size and mass to Pluto jostling around in its orbit. And until Pluto crashes into many of them and gains mass, it will remain a dwarf planet. Eris suffers from the same problem.
It’s not impossible to imagine a future, though, where astronomers discover a large enough object in the distant Solar System that could qualify for planethood status. Then our Solar System would have 9 planets again.
Even though Pluto is a dwarf planet, and no longer officially a planet, it’ll still be a fascinating target for study. And that’s why NASA has sent their New Horizons spacecraft off to visit it. New Horizons will reach Pluto in July 2015, and capture the first close-up images of the (dwarf) planet’s surface

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eBAY planning for PayPal spin-off

EBay announced Tuesday that it planned to spin off PayPal, the digital payment system that it bought in 2002 that now accounts for about half of the Silicon Valley giant’s revenue.
EBay said that in today’s climate of fast-moving innovation in e-commerce and new competition in the online payments space, it no longer believes it’s an advantage to have the two businesses tethered together.
“EBay and PayPal will be sharper and stronger, and more focused and competitive as leading, stand-alone companies in their respective markets,” chief executive John Donahoe said in a statement. “As independent companies, eBay and PayPal will enjoy added flexibility to pursue new market and partnership opportunities.”
The spinoff, set to occur late next year, will create two separate, publicly traded companies.
Tuesday’s announcement is something of a U-turn for eBay: When activist investor Carl Icahn pushed months ago for a spinoff of PayPal, eBay opposed the effort. In January, Donahoe told investors on a conference call: “Based on what we see today, we continue to believe that the company, our customers and our shareholders are best served by keeping PayPal and eBay together.”
The split comes as the online payments world is being shaken up by a host of new entrants, most notably Apple, which announced its new Apple Pay program in September. Apple has partnered with major retailers, such as Walgreens, McDonald’s and Staples, on the program that allows iPhone users to make purchases with their mobile devices, which will be linked to a consumer’s credit card.
Other companies, such as Alipay, the digital payment affiliate of Chinese e-commerce giant Alibaba, are also competitors with PayPal.
Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, said PayPal has a strong foothold in digital payments that could allow it to thrive even if Apple’s system might outdo it on convenience. “What PayPal has to do is determine which direction they want to go and how they want to differentiate themselves,” Sakhrani said.
PayPal will have to make decisions about where to invest its resources at a time when mobile payment businesses are still in their infancy. “Compared to the potential and expectation, the traction is low [for mobile payments] because it has been unclear that there’s any extra benefits to the consumers,” said Rajesh Kandaswamy, an analyst at technology research firm Gartner.
The eBay-PayPal split will be led by Donohoe and Bob Swan, the company’s chief financial officer. After its completion, Devin Wenig will take the helm of the new eBay company. Wenig currently serves as the president of eBay Marketplaces.
The new PayPal company will be led by Dan Schulman, an executive who has served in leadership roles at American Express, AT&T and Priceline. Schulman will join the company as president of PayPal immediately and will assume the title of chief executive after the split.
EBay’s stock rose about 8 percent on the news, to $57 per share, by late afternoon Tuesday.
PayPal has a large share of the digital payments business, with 152 million active accounts. It facilitated $203 billion in payments over the last 12 months, a 26 percent increase from 2013.
When eBay purchased PayPal more than a decade ago for $1.5 billion, the merger was widely considered a natural fit for two companies whose businesses were so interdependent. At the time, eBay was offering a competing service, BillPoint, but found that a large share of its shoppers preferred to use PayPal instead.
Now, more than a decade later, “we’re at that point in time in the investment cycle where decisions had to be made about whether or not they were working,” Sakhrani said. Ultimately, eBay leaders decided the best opportunity for growth was to unwind the complementary businesses, a move they hope will allow each to achieve a finer strategic focus.

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International Dollars and PPP

The Geary–Khamis dollar, more commonly known as the international dollar, is a hypothetical unit of currency that has the same purchasing power parity that the U.S. dollar had in the United States at a given point in time. It is widely used in economics. The years 1990 or 2000 are often used as a benchmark year for comparisons that run through time. The unit is often abbreviated e.g. 2000 US dollar (if the benchmark year is 2000) or 2000 Int$.
It is based on the twin concepts of purchasing power parities (PPP) of currencies and the international average prices of commodities. It shows how much a local currency unit is worth within the country's borders. It is used to make comparisons both between countries and over time. For example, comparing per capita gross domestic product (GDP) of various countries in international dollars, rather than based simply on exchange rates, provides a more valid measure to compare standards of living. It was proposed by Roy C. Geary in 1958 and developed by Salem Hanna Khamis between 1970 and 1972.
Figures expressed in international dollars cannot be converted to another country's currency using current market exchange rates; instead they must be converted using the country's PPP exchange rate used in the study.

Currencies are commonly quoted relative to each other in the foreign exchange (“forex”) market. For example, a 1.2500 quote for the EUR/USD currency pair means that one euro is exchangeable for 1.2500 U.S. dollars. The problem with using exchange rates is that they aren’t adjusted to reflect purchasing power parity (“PPP”) or average commodity prices within each country.
Roy C. Geary created the Geary-Khamis dollar, or international dollar, in 1958 to reflect the current year’s exchange rate with current PPP adjustments. Since its introduction, the international dollar has become the metric of choice for international organizations like the International Monetary Fund (“IMF”) or World Bank for comparing wealth and earnings between countries.
What is Purchasing Power Parity?
Purchasing power parity was developed in the 16th century to determine the relative value of different currencies and set exchange rates. In theory, identical goods would have the same price in different markets when prices are expressed in the same currency absent of transaction costs and trade barriers. Similarly, any differences in inflation are equal to the changes in currency exchange rates.
Of course, transaction costs and trade barriers exist in real life since exchange rates aren’t always equal to one. Economists must therefore recalculate currency exchange rates accounting for purchasing power parity differences caused by these transaction costs and trade barriers. These calculations are ultimately what are known as Geary-Khamis dollars or “international dollars”.
Converting to International Dollars
Currency conversions to international dollars are accomplished by dividing the amount of national currency by the PPP exchange rate to arrive at the international dollar value. For example, 500,000 ISK (Icelandic Krona) divided by a 121.91 PPP exchange rate yields I$ 4,101.38. PPP exchange rates are provided by a number of different international organizations including the IMF and World Bank.
The PPP exchange rate, or PPP conversion factor, is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. Basically, these figures help investors compare the cost of goods that make up gross domestic product (“GDP”) across many different countries relative to the United States.
Importance of International Dollars
International dollars have become extremely important in a world where currency exchange rates are commonly manipulated. For example, the World Bank estimated in 2005 that one international dollar was equal to about 1.8 Chinese yuan, which was considerably off from its nominal exchange rate. A failure to account for these changes could lead to a dramatically different perception of China’s economy.
Purchasing power parity differences can also be quite extreme when it comes to GDP per capita or other measures. For example, India’s nominal GDP per capita was $1,491 in 2012 while its PPP GDP per capita was $3,829. Developing countries tend to have higher PPP while developed countries tend to have higher nominal values, but nominal and PPP values are the same in the U.S. since it’s the benchmark.
Key Takeaway Points
• Purchasing Power Parity determines the relative value between different currencies by comparing their relative purchasing power internationally using the U.S. dollar as a standard benchmark.
• Geary-Khamis or international dollars factor in purchasing power parity and are calculated by dividing a given quantity of a country’s currency by the PPP exchange rate.
• International dollars have become extremely important in investment and economic circles as some countries have experienced large disparities between nominal and PPP economic figures.

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PM divestment plan

Prime Minister Narendra Modi's ambitious programme of disinvestment in big state-run companies started on Friday. The government is selling 5 per cent stake in state-run SAIL, India's second largest steel manufacturer by market value, to meet its disinvestment target for the 2014-15 fiscal year. The proceeds of the share sale will help the government meet its fiscal deficit target for the year.
Here is your ten-point cheat sheet on this story:
1) The disinvestment target for the year is Rs 58,425 crore out of which Rs 43,425 crore will come via share sale in PSUs. The government is likely to raise Rs 1,700 crore if the share sale in SAIL goes through at Rs 83 per share. The amount is just 4 per cent to the government's total disinvestment target of Rs 43,425 crore via share sale in PSUs.
2) The response to Friday's share sale in SAIL will be crucial for the government to gauge investor appetite ahead of the planned sale of a 10 per cent stake in Coal India and a 5 per cent stake in Oil and Natural Gas Corp. Stake sales in NHPC, Power Finance Corp and Rural Electrification Corp are also in the pipeline.
3) The bigger Coal India and ONGC stake sales should help the government raise a combined Rs 38,000 crore, as per the current market prices.
4) The government is likely to miss its disinvestment target for the year, analysts say. "The target that the government has set is a tall target," said Deven Choksey, managing director at Mumbai-based brokerage KR Choksey Securities.
5) There is no real excitement for state-run companies like SAIL among investors, analysts told NDTV. Most state-run companies have underperformed the broader markets despite a record rally this year. SAIL shares have risen just 18 per cent this year, lagging a near 36 per cent rise in the Sensex.
6) According to domestic brokerage Kotak, the government needs to come out with a long-term plan to improve performance of state-run companies. "In our view, the government may want to review its very ownership of PSU companies with a far bolder program of privatization," it said in a note last month.
7) Market expert Ambareesh Baliga told NDTV that long-term investors, with a 2-3 year horizon, should buy SAIL. "India cannot grow at 8 per cent without growth in infrastructure and steel is an important part of infra sector," he said.
8) The government is selling 20.65 crore shares in the company. Post the share sale, the government's stake will come down from 80 per cent to 75 per cent.
9) The share sale in SAIL is taking place through the Offer for Sale route, which helps promoters of listed companies to sell or dilute their shareholdings through an exchange based bidding platform.
10) The floor price or the minimum bid price for SAIL has been fixed at Rs 83, which is at a discount to Thursday's close price of Rs 85.35 on the Bombay Stock Exchange. Retail investors will get a 5 per cent discount

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EuroZone economy stalls

The euro-zone economy stalled in the second quarter, raising the ugly prospect that the region's meager recovery has lost momentum just as it faces fresh headwinds from Russia and Ukraine.
Germany's economy, long Europe's growth engine, shrank for the first time in more than a year, a development economists largely attributed to a mild winter that boosted activity in the first quarter at the expense of the second. The bigger concerns, they say, are France and Italy, where respectable rates of growth aren't even in sight.

"The euro-zone recovery never really got going, and now it appears to be petering out," said Simon Tilford, deputy director of the Centre for European Reform, a nonpartisan London think tank.
The gloomy numbers out of the euro zone—whose roughly $13 trillion economy accounts for 17% of the world's gross domestic product—join a litany of similarly sour reports this week from Asia, all pointing to signs of sudden weakness among many major economies.
The downturns in Europe and Asia come as the U.S. flashes signs of increasing economic vigor after a brief chill earlier this year. The U.S. economy grew in the second quarter by an annual rate of 4%, thanks to stronger consumer spending and corporate investment. Despite tepid wage gains, U.S. firms have been on the strongest sustained hiring stretch since 2006, adding more than 200,000 jobs each month since February.
But the growing sense of optimism in the U.S. contrasts with deepening uncertainty in many other parts of the world.
Mexico's central bank lowered its growth forecast for 2014 to 2.4% from 2.8% on Wednesday. Japan reported a sharp contraction in the second quarter as output fell 6.8% in the wake of an April increase in the country's sales tax. Japan's slow recovery, despite heavy stimulus, is in part the result of surprisingly weak exports—a condition that stems from soft demand elsewhere in the world and shows how weakness can spread among economies.
In China, the central bank reported Wednesday that the broadest measure of new lending had plunged by two-thirds in July from the previous month, setting off alarm bells that the world's second-largest national economy might be heading for a hard landing.
It is possible such sluggishness is temporary—July is often a down month for credit and June's credit growth had been exceptionally strong. Even so, the figures suggested that several months of "mini-stimulus" spending on infrastructure, transportation and information technology, as well the central bank's injections of cash into China's financial system, hasn't done much to lift the economy.

In the 18-member euro zone, GDP was flat in the second quarter compared with the first, the European Union's statistics office said Thursday. That translates into 0.2% growth in annualized terms.
Over the past year, the euro zone's economy expanded just 0.7%—too slow to reinvigorate investment and job creation or to escape the legacy of heavy public and private debts in many countries.
German GDP shrank an annualized 0.6% from the first quarter, and Italy's output fell, too. The French economy, the bloc's second largest behind Germany, was largely flat for a second straight quarter. Spain and the Netherlands posted some growth, but not enough to offset weakness in the economies of their larger peers. Nerves over Europe's outlook helped cause the yield on Germany's 10-year bond, considered a haven, to dip below 1% for the first time.
Germany's weak second quarter is widely seen as a hiccup: the country is enjoying record-high employment, rising wages and ultralow borrowing costs. A return to growth is expected in the current quarter. Germany's Bundesbank, which has considerable influence over the country's public opinion, made the unusual move of responding to Thursday's data with a statement from its economists, saying the trend "remains pointed upward."
However, the continued sluggishness of business investment, despite cash-rich corporations, is a puzzle that bodes ill for Germany's ability to lift euro-zone growth. Averaging out the last two quarters, which evens out weather-related swings in construction, Germany still only grew at a pace of about 1% in the first half. And that was before the crisis in Ukraine intensified last month, leading to growth-draining sanctions imposed by the U.S. and EU against Russia.
"We're seeing the crisis worsen in Ukraine and Russia as well as a difficult political situation in the Middle East," Kasper Rorsted, chief executive of German consumer products company Henkel AG HEN.XE -0.69% Henkel AG & Co. KGaA Germany: Xetra €79.35 -0.55 -0.69% Dec. 4, 2014 10:54 am Volume (Delayed 15m) : 3,405 P/E Ratio 20.88 Market Cap €36.40 Billion Dividend Yield 1.51% Rev. per Employee €344,803 More quote details and news » HEN.XE in Your Value Your Change Short position said in an earnings call Tuesday. "The situation remains volatile, and we don't see it changing any time soon."
France's problems are rooted more deeply, in tight fiscal policies and long-unreformed markets. The country's unemployment is at all-time highs. A shrinking construction sector is making things worse, forcing entrepreneurs like Patrick Liébus to resort to innovative strategies to keep people on the job.
Market Talk
Prolonged Euro-Zone Downturn, Says Mizuho
The weak GDP figures for Germany may to an extent be attributed to some production being shifted to earlier months, but even so, the data is very disappointing, says Mizuho International's chief European economist Riccardo Barbieri. "For the euro zone as a whole, surveys are now, on balance, worsening and so we cannot rule out that these numbers mark the beginning of a more prolonged downturn rather than a dip," he says. (josie.cox@wsj.com)
Worrying Signs in French GDP, Says Barclays
A breakdown of France's GDP shows no reassuring signs, says Barclays economist Fabrice Cabau. The rebound in consumer spending only corrects the fall in the first quarter and investment has fallen once again, Mr. Cabau notes. "All in all, we find that today's investment and underlying private consumption disappointments are a key worrying sign for the French economy outlook," says Mr. Cabau.
European policy makers have hoped that the recovery would gather steam of its own, so that they don't have to experiment with controversial stimulus measures, including money-printing by the European Central Bank or large-scale government investment spending.
Many economists, as well as European governments, forecast recovery will resume in the third quarter and strengthen by 2015. Business surveys such as the purchasing managers index imply faster GDP growth than recorded so far—an anomaly that optimists say will be corrected this fall.
But deeper worries loom, too. With each additional quarter of near-zero growth, the bloc's vulnerabilities—weak productivity, a stagnating labor force and fragile banking system—become more firmly entrenched. That could make the bloc resistant to stimulus from fiscal or monetary policies, a problem that has gripped Japan for years.
"Our view is that temporary factors dampened growth in the first half of 2014, and this will reverse itself in the third quarter," said Marco Valli, chief euro-zone economist at Italian bank UniCredit.
Mr. Valli said two risks threaten the outlook, however: Geopolitical and trade frictions between the EU and Russia could hurt euro-zone business sentiment; and the slowdown in global trade and emerging-market growth could hit European exports.
Japan is the first modern economy to slip into persistent consumer price declines known as deflation—a condition some European countries now seem perilously close to entering. Japan's 18-month-old stimulus experiment is the first test of a country attempting to wrench itself out of a deflationary slump.
"We should not wait until we all become Japan, we should act now," said Paul De Grauwe, professor at London School of Economics. He recommends a two-pronged approach with massive stimulus spending by governments—particularly in Germany, France and other countries that can borrow cheaply—buttressed by ECB purchases of public and private debt to increase the money supply.
But the ECB has shown little appetite for such measures beyond the cheap bank loans and record-low interest rates it has already enacted. It argues that overhauls aimed at making economies more competitive are the answer to Europe's problems.

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Green Peace at Indian Tea rescue

Greenpeace calls on the industry to save Indian tea from pesticides

Greenpeace India called on the tea industry to save Indian tea from pesticides while launching their report, Trouble Brewing , today. The study exposes the presence of pesticides, considered highly and moderately hazardous by the World Health Organization (WHO), in leading national and international tea brands. The report also reveals the presence of other pesticides which have not been approved for use on tea crops in India.
"Indian tea is a national pride, and it should not be the one linked to toxic chemicals with serious environmental and health risks. All stakeholders in the tea industry should come forward and take steps to safeguard the reputation of our national drink," said Neha Saigal, Senior Campaigner, Greenpeace India.

Between June 2013 and May 2014, Greenpeace India tested a sample of 49 branded packaged teas from 8 of the top 11 companies that dominate the branded tea market in India and which also export to countries like Russia, UK, US, UAE and Iran.

These include the well-known brands of Hindustan Unilever Limited, Tata Global Beverages Limited, Wagh Bakri Tea, Goodricke Tea, Twinings, Golden Tips, Kho-Cha and Girnar.
The test results show the presence of pesticides classified both as Highly Hazardous (Class 1b) and Moderately Hazardous (Class II) according to WHO. A large number of the samples tested positive for a cocktail of toxic pesticides. DDT was present in almost sixty-seven percent of the tea samples even though it is no longer registered for use in agriculture in India  and was banned in such applications as long ago as 1989 (although it is still in use for control of disease carrying insects and may be present as a contaminant of other pesticides).

Many tea samples tested positive for Monocrotophos, a highly hazardous organophospohorous pesticide. It is to be noted that Food and Agriculture Organization (FAO)  urged developing countries to phase out these pesticides post the tragic incident last year where 23 school children died after eating school meal contaminated with monocrotophos. The cocktail also includes neoniconitoid insecticides such as imidacloprid, which are associated with reproductive or developmental impacts in animals, as well as affecting bees and other beneficial insects.

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What is meant by RBI interest rates

Key policy rates used by RBI to influence interest rates

The key policy or 'signalling' rates include bank rate, the repo rate, the reverse repo rate, cash reserve ratio and statutory liquidity ratio.

RBI increases its key policy rates when there is greater volume of money in the economy. In other words, when too much money is chasing the same or lesser quantity of goods and services.

Conversely, when there is a liquidity crunch or recession, RBI would lower its key policy rates to inject more money into economic system.


What is repo rate?
Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate.

If the RBI wants to make it more expensive for banks to borrow money, it increases the repo rate.

Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
The current repo rate is 5.50%.


What is reverse repo rate?
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term.
Like the repo, this is done by RBI selling government bonds to banks with the commitment to buy them back at a future date.

The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it.

RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.


What is Cash Reserve ratio (CRR)?
Cash reserve Ratio (CRR) is the amount of funds that banks have to park with RBI. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The bank increases CRR to impound surplus liquidity.

CRR serves two purposes: One, it ensures that a portion of bank deposits are always available to meet withdrawal demand, and secondly, it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.
The current CRR is 6%.


What is SLR? (Statutory Liquidity Ratio)
Apart from keeping a portion of deposits with RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.
In times of high growth, an increase in SLR requirement reduces lendable resources of banks and pushes up interest rates.
The current SLR is 25%.


What is the bank rate?
Unlike other policy rates, the bank rate is purely a signalling rate and most interest rates are de-linked from the bank rate. Also, the bank rate is the indicative rate at which RBI lends money to other banks (or financial institutions) the bank rate signals the central bank's long-term outlook on interest rates.

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Everything about "Gold Standard"

Definition of the Gold StandardMy normally extensive Economics Glossary does not have an entry on the gold standard, so we'll have to look elsewhere for a definition. An extensive essay on the gold standard on The Encyclopedia of Economics and Liberty defines the gold standard as "a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." A county under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold. Other precious metals could be used to set a monetary standard; silver standards were common in the 1800s. A combination of the gold and silver standard is known as bimetallism.
A Very Brief History of the Gold Standard
If you would like to learn about the history of money in detail, there is an excellent site called A Comparative Chronology of Money which details the important places and dates in monetary history. During most of the 1800s the United States was had a bimetallic system of money, however it was essentially on a gold standard as very little silver was traded. A true gold standard came to fruition in 1900 with the passage of the Gold Standard Act. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelery). The Bretton Woods System , enacted in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. "The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. At that point for the first time in history, formal links between the major world currencies and real commodities were severed". The gold standard has not been used in any major economy since that time.
The Benefits and Costs of a Gold Standard
The main benefit of a gold standard is that it insures a relatively low level of inflation. In articles such as " What is the Demand for Money? " we've seen that inflation is caused by a combination of four factors:
1.    The supply of money goes up.
2.    The supply of goods goes down.
3.    Demand for money goes down.
4.    Demand for goods goes up.
So long as the supply of gold does not change too quickly, then the supply of money will stay relatively stable. The gold standard prevents a country from printing too much money. If the supply of money rises too fast, then people will exchange money (which has become less scarce) for gold (which has not). If this goes on too long, then the treasury will eventually run out of gold. A gold standard restricts the Federal Reserve from enacting policies which significantly alter the growth of the money supply which in turn limits the inflation rate of a country. The gold standard also changes the face of the foreign exchange market . If Canada is on the gold standard and has set the price of gold at $100 an ounce, and Mexico is also on the gold standard and set the price of gold at 5000 pesos an ounce, then 1 Canadian Dollar must be worth 50 pesos. The extensive use of gold standards implies a system of fixed exchange rates. If all countries are on a gold standard, there is then only one real currency, gold, from which all others derive their value. The stability the gold standard cause in the foreign exchange market is often cited as one of the benefits of the system.
The stability caused by the gold standard is also the biggest drawback in having one. Exchange rates are not allowed to respond to changing circumstances in countries. A gold standard severely limits the stabilization policies the Federal Reserve can use. Because of these factors, countries with gold standards tend to have severe economic shocks. Economist Michael D. Bordo explains:
"Because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation, which is the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change.
The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8.
Moreover, because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real output, therefore, is more variable under the gold standard. The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent between 1946 and 1990."
So it would appear that the major benefit to the gold standard is that it can prevent long-term inflation in a country. However, as Brad DeLong points out, "if you do not trust a central bank to keep inflation low, why should you trust it to remain on the gold standard for generations?" It does not look like the gold standard will make a return to the United States anytime in the foreseeable future.


What Do We Use Today?
Almost every country, including the United States, is on a system of fiat money , which the glossary defines as "money that is intrinsically useless; is used only as a medium of exchange". We saw in the article " Why Does Money Have Value " that the value of money is set by the supply and demand for money and the supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, are allowed to fluctuate based on market forces. Next we'll look at how the monetary system used can change other variables in the economy.
What is the gold standard?
It’s a monetary system that directly links a currency’s value to that of gold. A country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Because the global gold supply grows only slowly, being on the gold standard would theoretically hold government overspending and inflation in check. No country currently backs its currency with gold, but many have in the past, including the U.S.; for half a century beginning in 1879, Americans could trade in $20.67 for an ounce of gold. The country effectively abandoned the gold standard in 1933, and completely severed the link between the dollar and gold in 1971. The U.S. now has a fiat money system, meaning the dollar’s value is not linked to any specific asset.
Why did the U.S. abandon the gold standard?
To help combat the Great Depression. Faced with mounting unemployment and spiraling deflation in the early 1930s, the U.S. government found it could do little to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the U.S. and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates. “Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold,” said Liaquat Ahamed, author of the book Lords of Finance. The U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Richard Nixon abruptly ended the practice to stop dollar-flush foreigners from sapping U.S. gold reserves.
Why is gold in debate again?
Libertarian Rep. Ron Paul (R-Texas) made a return to “honest money” a key plank of his presidential run, and the idea took hold among Tea Party conservatives outraged over the Federal Reserve’s loose monetary policies since the financial crisis. They argue that the U.S. debt now exceeds $16 trillion because the government has become too cavalier about borrowing and printing money. When the Fed prints money, gold-standard advocates say, it cheapens the value of a dollar, promotes inflation, and effectively steals money from the citizenry. In a nod to those ideas, the Republican Party’s 2012 platform calls for the creation of a commission to investigate setting a fixed value for the dollar. The gold standard “forces the U.S. to live within its means,” said investment strategist Mark Luschini. “Think of it as a person with a debit card rather than a credit card. The debit card holder can only spend what he or she has in the bank.”
What are the downsides?
A fixed link between the dollar and gold would make the Fed powerless to fight recessions or put the brakes on an overheating economy. “If you like the euro and how it’s been working, you should love the gold standard,” said economist Barry Eichengreen. Beleaguered Greece, for instance, cannot print more money or lower its interest rates because it’s a member of a fixed-currency union, the euro zone. A gold standard would put the Fed in a similar predicament. Gold supplies are also unreliable: If miners went on strike or new gold discoveries suddenly stalled, economic growth could grind to a halt. If the output of goods and services grew faster than gold supplies, the Fed couldn’t put more money into circulation to keep up, driving down wages and stifling investment.
Could the gold standard come back?
It’s very unlikely. In a University of Chicago poll this year, not one of 40 top economists surveyed supported a return to gold. The last gold standard commission, established by President Ronald Reagan, voted by a wide margin against bringing it back. The size and complexity of the U.S. economy would also make the conversion extremely difficult. Just to back the dollars now in circulation and on deposit—about $2.7 trillion—with the approximately 261 million ounces of gold held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce, up from about $1,780, causing huge inflation. “It could do massive damage to the economy,” said John Makin, an economist at the American Enterprise Institute. So why the clamor for its return? Nostalgia, said economist Charles Wyplosz. “People long for a simpler age,” when the U.S. “was the dominant economy and there were no financial markets to speak of.” It’s like “getting back together with that old girlfriend,” said MarketWatch’s David Weidner. The current system may not be perfect, he says, but what people forget is that “the gold standard never works.”
Gold is one of the most widely discussed metals due to its prominent role in both the investment and consumer world. Even though gold is no longer used as a primary form of currency in developed nations, it continues to have a strong impact on the value of those currencies. Moreover, there is a strong correlation between its value and the strength of currencies trading on foreign exchanges.
To help illustrate this relationship between gold and foreign exchange trading, consider these five important aspects:
1. Gold was once used to back up fiat currencies.
As early as the Byzantine Empire, gold was used to support fiat currencies, or the various currencies considered legal tender in their nation of origin. Gold was also used as the world reserve currency up through most of the 20th century; the United States used the gold standard until 1971 when President Nixon discontinued it.
One of the reasons for its use is that it limited the amount of money nations were allowed to print. This is because, then as now, countries had limited gold supplies on hand. Until the gold standard was abandoned, countries couldn't simply print their fiat currencies ad nauseum unless they possessed an equal amount of gold. Although the gold standard is no longer used in the developed world, some economists feel we should return to it due to the volatility of the U.S. dollar and other currencies.
2. Gold is used to hedge against inflation.
Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.
In April 2011, investors feared declining values of fiat currency and the price of gold was driven to a staggering $1,500 an ounce. This indicates there was little confidence in the currencies on the world market and that expectations of future economic stability were grim.
3. The price of gold affects countries that import and export it.
The value of a nation's currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.
In other words, an increase in the price of gold can create a trade surplus or help offset a trade deficit. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises. For example, countries that specialize in producing products made with gold, but lack their own gold reserves, will be large importers of gold. Thus, they will be particularly susceptible to increases in the price of gold.
4. Gold purchases tend to reduce the value of the currency used to purchase it.
When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency.
5. Gold prices are often used to measure the value of a local currency, but there are exceptions.
Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
For example, if there is high demand from an industry that requires gold for production, this will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time. Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.
The Bottom Line
Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies.

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